There have been calls to review the law to ensure Kenyans can use their retirement funds to secure homes. FILE PHOTO | NMG
Pension funds not only provide social security, they play a
major role in driving various activities that can stimulate economic
growth.
It is this understanding that has seen the
call of unlocking pension funds to drive various economic activities
including private equity and real estate development among others.
Housing
is a global challenge and rapid urbanisation is pushing up demand for
housing, especially affordable housing. As populations grow, there is a
need to bring on board multiple agencies including governments,
non-government organisations (NGOs), private sector and individuals to
address this issue.
It is estimated that Africa’s
population will hit 2.4 billion by 2050, thus exacerbating the current
housing shortage. Kenya’s housing shortage stands at about two million
units, Nigeria 17 million units and South Africa two million. This is a
huge gap that needs to be addressed. The solution is in providing
affordable housing for this growing population, especially in urban
centres.
Though various stakeholders have rolled out initiatives to
address the shortage, more still needs to be done, more so as Africa’s
population continues to grow. Governments need to put in place policies
that make housing finance accessible and affordable.
The
World Bank notes that only three per cent of sub-Saharan Africa’s
population can afford a mortgage. Part of the issue is investors
focusing on higher value housing mainly due to higher returns and
availability of supporting infrastructure.
Private
capital and investment funds are rarely directed towards the mass
housing market and usually focus on the commercial real estate segment.
This locks out a high percentage of people.
Lower
income earners can barely afford this kind of housing, as the cost is
prohibitive. Pension funds can play a role in addressing this situation.
They have a long-term horizon compared to depository institutions.
Investing
a section of their assets in housing would not only help address the
housing shortage, but also help them diversify their portfolio thereby
achieving favourable risk adjusted returns.
Pension
funds in Kenya have traditionally invested in property, equities and
debt instruments but there has been agitation to unlock them to drive
more social and economic growth.
One of the solutions
proposed is to allow members of pension funds to use their accumulated
benefits as security for their mortgages.
A
regulated housing finance institution would offer the mortgage at
agreeable interest rates. In Mauritius, pension schemes can allocate up
to 26 per cent of their assets for housing loans to members.
The
Pension Fund Act in South Africa allows a retirement fund to grant a
member a loan that should not exceed 90 per cent of the value of the
property or the accumulated benefits of the member.
Kenya
made strides by amending Section 38 of the Retirement Benefit Authority
to enable pension members to attach up to 60 per cent of their
accumulated benefits to secure a mortgage. This allows members to
acquire land or a house, pay for stamp duty, valuation fees and legal
fees among other transaction fees. The 60 per cent is only a guarantee
to get a mortgage.
The uptake, has however, been
extremely low with trustees wary of managing the risk due to many grey
areas in implementing this while mortgage institutions have failed to
respond with more favourable terms.
There have been calls to review the law to ensure Kenyans can use their retirement funds to secure homes.
Two
more options may be explored by both policy makers and pension funds
trustees. One would be financing one of the government’s Big 4 Agenda;
namely, creation of 500,000 new homeowners through facilitation of
affordable housing.
With Kenya’s spiralling debt, it
would be prudent to rally institutional investors such as pension funds
to support domestic resource mobilisation hence cushion the government
against the inherent currency risk in Eurobonds and any foreign currency
indexed debt.
Property investments have helped pension
funds achieve stable returns in the past when other conventional assets
had a downturn. Although there is scanty information on how the low
cost housing project will be operationalised, trustees of pension funds
can dive right in if the investment can earn them reasonable returns.
Securitising
the debt for liquidity and tax incentives would go a long way to whet
the appetites of trustees to invest a section of the sector’s billions
in the project. The Zamara Pension Performance Watch, a survey of
schemes whose assets total to Sh677 billion (about 70 per cent of the
country’s pension assets), indicates that just about four per cent of
the schemes’ assets had been invested in immovable property as at
December 2017.
Retirement benefits regulations allow schemes to invest up to 30 per cent of their assets in property.
Second,
the policy makers may consider borrowing a leaf from the Singaporean
Social Security System where retirement savings may be accessed to cater
for medical, housing and education expenses.
Erick Omondi, Pensions Consultant at Zamara Actuaries, Administrators and Consultants.
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